More than a third of landlords have considered selling their rental properties because they can no longer offset the cost of mortgage interest against their tax bill.
Some 37 per cent of landlords have considered selling rental properties as a result of buy-to-let tax changes introduced in 2016, according to research by The Landlord Works, part of Nationwide.
Landlords could previously deduct mortgage expenses from their rental income in before tax, reducing their overall bill.
However, this started to be phased out in 2017 before being stopped in April 2020.
Not all landlords are selling: There were 47,400 new buy-to-let companies incorporated in 2021 across the UK according to Companies House data.
The Landlord Works found that more than a quarter of landlords with larger portfolios of 20 or more buy-to-lets had already sold one or more properties to lessen the tax impact.
For landlords with between two and five properties, it said 13 per cent had sold in order to minimise the tax burden.
Previously, a landlord with mortgage interest payments of £400 a month on a property rented out for £1,000 a month in rent would only pay tax on £600 of that income.
Now landlords receive a tax credit, based on 20 per cent of their mortgage interest payments. This is less generous for higher-rate taxpayers, who previously received the 40 per cent tax relief on mortgage payments.
A higher rate taxpaying landlord with mortgage interest payments of £400 a month on a property rented out for £1,000 a month now pays tax on the full £1,000, albeit with a 20 per cent rate on the £400 that is being used towards the mortgage.
|Tax year||Annual rental income||Annual mortgage interest||Rental income that is taxed||Tax on rental income||Mortgage interest relief||Net profit after tax|
Nearly eight in ten landlords feel the changes unfairly punish them, according to the research, with a similar number saying there should be more support for landlords following the pandemic.
Paul Wootton, director of home propositions at Nationwide said: ‘In recent years there have been numerous changes for landlords to get their heads around.
‘Now with the loss of the mortgage interest tax relief many are questioning whether to leave the sector all together by selling some or even all of their properties in order to help reduce their tax burden.’
Limited companies can reduce tax burden
Selling up altogether may be a solution for many landlords, but others have found a way to reclaim the mortgage interest tax relief.
More and more buy-to-let property investors are purchasing property via limited companies, rather than in their own personal names.
This allows them to offset all of their mortgage interest against the rental income before paying tax.
This means that whilst individual landlords are effectively taxed on turnover, company landlords are taxed on profit.
There were 47,400 new buy-to-let companies incorporated in 2021 across the UK according to Companies House data, the highest number on record.
In fact, over the last four years the number of landlords who have put their buy-to-let properties into a company, rather than holding them in their personal name, has doubled, according to research by estate agent Hamptons.
Hamptons estimates that around half of all new landlords that bought homes last year used a company to hold their buy-to-let, and 40 per cent of these new purchases went into a company that was less than a year old.
Rob Bence, founder and chief executive at property forum, Property Hub, says: ‘The tax changes announced in 2015 put the issue of ownership structure on the radar of investors.
‘Prior to that, personal ownership was the default and I don’t remember investors even considering an alternative.
‘Now it’s a decision every investor must make, with many deciding that company ownership suits them better.
‘It may have suited them better even without the tax changes, for reasons relating to making income tax savings, dividing ownership between family members, and structuring a portfolio to be inherited.’
Advantages of a company structure for buy-to-let
Whether there is an advantage to be had or not depends on the landlord’s individual circumstances.
Many landlords own their properties outright, meaning mortgage interest relief won’t apply to them.
However, there are other tax advantages from owning a property in a limited company which apply to both mortgage holders and those who are mortgage-free.
Corporation tax is lower
Instead of income tax, company landlords pay corporation tax on their profits, which is currently set at 19 per cent.
This is opposed to the much higher rate of income tax for landlords owning properties in their own name: currently 40 per cent for income earned over £50,000 and 45 per cent for income earned over £150,000.
James Wood, policy manager at the National Residential Landlords Association says: ‘This can mean that if their circumstances are right, it can be more profitable to set up as a limited company.’
Those who own under their own name may also face a heftier tax bill on their profits when they sell a property.
The capital gains tax rate on residential property is 28 per cent for higher-rate taxpayers.
However, if you own via a limited company, you will only be subject to the 19 per cent corporation tax when you sell.
Reinvesting profits or saving for retirement
To withdraw income accumulated within the company, buy-to-let landlords can either pay themselves via a salary, dividends, or a director’s loan.
These will be taxed at the usual rates, which may not be tax-efficient for those relying on their properties as source of income and regularly taking out money.
However, for those looking to simply build up profits within the company and re-invest them in more properties, or who are building a nest-egg for retirement, limited company ownership can be much more tax-efficient.
‘A limited company route should be considered for more long-term investing where you’re unlikely to draw dividends down,’ says Bence.
‘Most investors see property as a long-term strategy so are happy for their funds to accumulate, to either add to their portfolio or build a nest egg for retirement.
‘If they hold the property until they retire and no longer have earned income, they may then be able to take dividends from the property company at a lower combined rate of corporation tax, plus income tax on dividends, than if they’d paid the higher rate of income tax by taking the income earlier.’
Passing on wealth
A final advantage of owning property in a limited company structure is that it can be a great vehicle for passing on wealth to family members, without incurring significant taxes.
Mark Barrett, a landlord tax specialist at property tax advice ltd says: ‘Often leaving a legacy for the children becomes important, so creating a company can help you to better plan for legacy and inheritance tax.
‘For example, children can be moved into a company directorship in adulthood, or maybe after having already been shareholders from inception. The company is a great vehicle for legacy and longevity planning.’
Landlords who own buy-to-let properties in their own name rather than via a company now pay tax on their entire rental income, rather than their profit after mortgage interest is paid
When passing on cash or assets – including properties – owned in a personal name, the recipient needs to pay inheritance tax of 40 per cent on anything over £325,000.
This applies unless the property is passed on seven years or more before the original owner dies.
Disadvantages of a company structure for buy-to-let
Higher mortgage costs
The most obvious disadvantage of buying or owning a property via a limited company is when it comes to mortgage costs.
The average two-year fixed rate mortgage for someone owning a buy-to-let their own name is 2.94 per cent, according to Moneyfacts. For those buying via a limited company, the average interest rate is 3.47 per cent.
Based on those rates, the average non-company landlord with a £200,000 interest-only mortgage would pay £490 a month, compared to a limited company landlord paying £578 a month.
However, according to Chris Sykes of mortgage advisor Private Finance, the gap between personal name and limited company mortgages is often far wider.
Sykes says that a limited company investor could expect to pay a whole percentage point more for a two year or five year mortgage.
‘My clients buying in their own name will typically pay around 1.90 per cent for a five year fix, whereas in a company they will pay closer to 3.00 per cent,’ he says.
For landlords with large property portfolios, however, the gap between mortgage costs associated with limited companies and personal names begins to narrow.
He says: ‘Limited company ownership typically attracts more expensive mortgage rates and generally higher fees, however, once a landlord has more than 10 properties whether personal name or through a company they will often be subject to these higher costs or close to in any case.’
Furthermore, arrangement fees, which can either be paid up front or added to the mortgage, tend to be higher when buying via a limited company.
‘Times are changing, but mortgage rates are still generally a bit higher for limited company products,’ adds Bence.
‘Product costs can also be more expensive and the process is often lengthier – although this is also improving.’
The potential for being double-taxed
For buy-to-let landlords looking to use their rent as a form of income to live on, having a property in a limited company will often be less tax-efficient.
‘You could end up getting taxed twice if you want to take money out,’ says Bence.
‘You’ll pay corporation tax, but you’ll also pay personal tax on the dividends you withdraw,’ says Bence.
‘It depends on your strategy, but this can be one of the major drawbacks of investing in a limited company.’
‘If investors are wanting to draw cash from their company every month, investing as an individual is likely to be more tax efficient.’
Higher-rate taxpayers looking to pay themselves dividends can end up paying both corporation tax of 19 per cent on the company’s profits, and additional 32.5 per cent tax on their dividend.
Limited benefits for basic rate taxpayers
If you are a basic rate taxpayer and are considering buying just one or two buy-to-let properties then it might make sense to buy under your own name.
Bence says: ‘The benefits of investing in a limited company really kick in when an investor’s income reaches the higher tax bracket.
‘So if their income is way off that higher tax band, then it may be worth sticking with investing as an individual.’
Always seek tax advice: A qualified tax advisor will be able to advise landlords and budding buy-to-let investors based on their personal circumstances
Owning a limited company also comes with costs, such as ensuring the company is compliant with industry regulations.
For landlords who don’t have many properties, these costs may outweigh the tax benefits.
Property tax advice ltd’s Barrett adds: ‘The rate of growth of the portfolio size is important. Yes, a company may save you tax but if you’re only going to grow your portfolio very slowly, then that first property has got to carry the weight of all the company costs on its own for a long time.
‘You might save tax but you’ll probably be paying at least as much, and potentially more, for the added compliance involved in managing and maintaining a company.’
There is also an added layer of bureaucracy for limited company buy-to-let investors to take into account.
Company accounts must be formally prepared and filed, records maintained, and directors appointed.
This creates an added layer of responsibility for landlords choosing the limited company route.
Lucy Pendleton, property expert at estate agents James Pendleton says: ‘Owning through a company is definitely more of a hassle.
‘Treating your buy-to-let as a business guarantees more paperwork and complexity. and that may mean calling in an accountant.
‘You will need to file a return at Companies House and submit annual accounts.’
Costs of moving existing properties into company structure
Landlords with existing property portfolios can also incur substantial costs when transferring the property into the limited company structure.
The NRLA’s Wood says: ‘The company is an entirely separate entity, meaning the property must be transferred over, incurring capital gains, stamp duty and the associated cost of the sale and remortgage.
‘As a result, it’s really important that landlords take tax advice about their own individual circumstances before deciding which structure will suit them best.
How should landlords decide?
Ultimately, whether or not you decide to use a limited company will depend on personal tax situation and your future goals when it comes to buy-to-let.
James Wood of the NRLA says: ‘It really depends on your goals and how quickly you wish to expand your portfolio.
‘There is no easy answer on whether to invest in property via a limited company, and you need to map out what you want to achieve and which set up will lead to the best outcomes.
Lucy Pendleton adds: ‘First, do your homework or get some financial advice to see if the sums steer you one way or another.
‘Your own personal tax rate and the number of properties you’re planning to invest in will be big factors in your decision.’
For a basic rate taxpayer starting out, it may make sense to purchase the first buy-to-let property in their own name. After all they may find they don’t even enjoy being a landlord.
Anyone looking to supplement their income from property may also find that owning within a company is not as tax efficient as owning in their own name.
However, for investors not looking to draw income from the rent, and who face the prospect of all their rental income being taxed at the higher rate of income tax, the company structure may be worth exploring.
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